Do Populist-Led Administrations Inevitably Wreck the Economic System?

“Cambio, cambio.” Beneath the scorching heat, scores of currency traders are selling US dollars on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), their business is booming before the 26 October congressional elections in a country long used to saving in the greenback.

“The best time to buy is currently,” states a arbolito, refusing to provide her identity. “[The dollar] went down slightly but it’s deceptive – it’ll rise again.”

Similar to her, economists from all backgrounds anticipate a depreciation of the Argentine peso once the voting concludes. The president has placed a limit on the peso to control soaring price increases and now it is artificially high and reserves are depleted, causing Argentina’s economy stagnant as consumers turn to cheap imports.

Ideal Conditions

The nation represents a unique situation. Argentina has been repeatedly hit by sovereign defaults and financial turmoil and the electorate have been susceptible for decades to left-leaning populist movements, such as the powerful Peronism, and currently the president’s rightwing version.

The president is a textbook populist: captivating, iconoclastic, promising forceful policies to reclaim control of the economy from the establishment for the benefit of ordinary citizens.

These key characteristics are shared by his ally to the north, as well as Nigel Farage, who styles himself as a pint-swilling champion of the common man even though he is a privately educated former stockbroker.

Until recent months, the president’s strategy – including extensive privatisations and severe public spending cuts – had earned praise from international lenders for helping to control inflation in check. This plan has something in common with that of Milei’s idol Margaret Thatcher, who similarly viewed rising prices as a dragon to be slain, regardless of the consequences.

However financial markets began losing confidence in Milei’s radical project in recent months after a poor performance in local polls and a series of graft allegations. Solely large-scale financial intervention from abroad has averted what seemed destined to be a full-blown monetary collapse.

Inconsistencies

The 2016 referendum several years ago likely contained similar reasoning, and its leader, Boris Johnson, swept away concerns regarding fiscal impacts with a bullish determination to implement the “will of the people” despite the establishment’s horror.

Farage to date outlined limited plans to paper aside from a call for mass deportations, that he later appeared to revise on the hoof. He wants to rein in the Bank of England, perhaps even ditching its governor, the incumbent, with distrust toward traditional institutions being a key part of populist rhetoric.

His fiscal plans appear to be in flux: wary of being accused of proposing a Liz Truss-style splurge, he lately dropped a pledge to make significant tax reductions. His Reform party deputy, the party chairman, stated they would concentrate instead on reductions in government expenditure.

The opposition hopes this position will enable it to depict Farage as intending to bring back fiscal tightening – a point the chancellor has made repeatedly, contrasting it with her approach of boosting government spending.

Jo Michell says there exist inconsistencies within the populist platform, as it stands. “The party is funded by very wealthy people calling for tax cuts and reduced rules, yet also emphasizing the grievances of ordinary workers and the loss of industrial jobs,” he explains. “There’s a tension here among wealthy supporters seeking Thatcherism on steroids, and this story of restoring British jobs and reindustrialisation.”

Holding on to Power

Realistically, the evidence suggests populists of any stripe tend to fare well when confronting real-world challenges (although every populist leader promises distinct solutions).

Recent research from a leading journal examined the performance of 51 populist presidents and prime ministers, over more than a century. It found that on average, after 15 years, gross domestic product per head is often a tenth less in countries governed by populist rulers than in comparable countries with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the decay of governance usually go hand in hand under populist governments,” argue the paper’s authors.

A further interesting result of the research, however, is despite their economic costs, these leaders are often effective at holding on to power, lasting on average a considerable time, compared with shorter tenures for their more moderate equivalents.

In other words, it remains uncertain whether even if their policies fail, such leaders immediately pay the price at the ballot box. Similar to pledges made to regain sovereignty, their appeal reaches beyond mundane economics.

Yet back in Buenos Aires, whether Milei’s populist project fails or is sustained through foreign assistance, Argentina’s citizens are already bearing a heavy price.